Types of Internal Control of Weaknesses Egyptian Firms Suffer From

Executive Summary

Multinationals face a lot of hardships in the host country which they inhabit in order to expand their market base for the products and services they produce. Most of these companies find it very difficult to adhere to the tough rules and regulations laid down by the countries, in which they decide to operate their businesses. In this paper, will be adequately discussed the factors and remedies to the problems faced by these multinationals in trying to expand their businesses, especially in Egypt. Egypt has a very complex economy with the varied lifestyles ranging from those exhibited by the Muslims, Christians and other major religions in the world. It, therefore, calls for proper and amicable ways of expanding the business into this territory. A number of factors may encourage or impede the success of this noble course in the country. Multinationals venturing into this territory must then adhere to certain norms and standards set in order to balance the right role played by the opposing groups in the management of these multinationals. These include the subsidiaries and their respective managers (Beck 56).

Chapter One: Introduction

1.1 Statement of Problem

Due to the fact that most multinationals operate in very different countries, these multinationals encounter a series of different regulatory laws governing trade in these different countries. Any multinational planning to venture or expand into the Egyptian market territory is not left behind in this highway of hurdles and difficulties at the hands of several political elites in the very country.

1.2 Background Information

For a long time in history, multinationals have been considered to be very open systems. This is because they are affected and, at the same time, affect their immediate environment. The environment in Egypt has some variables and factors that might favor or not favor the subsidiary in question. This would greatly affect the operations and the ultimate performance of the company taking part in this venture. This environment can be classified into legal, political, cultural, social, technological or even economic environment. These factors are usually out of control of the subsidiary firm.

Apart from these environmental factors, a number of other factors termed the variables also affect the performance of these subsidiary firms during the measurement and the evaluation of the performance of the same subsidiary. These include features like the transfer price between the subsidiaries themselves, the change in the foreign currency and the inflation problem. This, therefore, calls for the separation of the management role from that of the subsidiary in order to attain some standard evaluation tools in the performance approval (Barth et al. 57). An approach that is closer to this would help the subsidiary to efficiently underscore its mandate in controlling the trade mishaps in the country, wherein this case Egypt is.

It is possible to have a poor management practice or outcome alongside a good performance by the subsidiary and vice versa. Therefore, the multinationals must incorporate the environmental factors in the establishment of the performance by the managers and the subsidiaries therein. The problem connected to the transfer of prices becomes even more complicated with the way Egypt handles such policies. The government is actively involved in the interest earned from such prices and thus, it will automatically be different from the origin country to the multinational. The other factors of foreign currency and the ever-changing inflation rate in Egypt greatly affect the multinationals in this area of operation.

1.3 Significance of Research

From the title of the research, it is very clear that it majorly dwells on the attempts aimed at developing the necessary performance evaluation tools that can be used in the manipulation of the foreign policies in Egypt in order to attain much standard and accommodating marketing atmosphere. The paper achieves this by developing the right paths to follow in the measurement and evaluation of the environmental factors. This will be narrowed to the multinationals operating in Egypt and those planning to avail their services in the country.

This model bridges the gap between the subsidiaries and their respective managers. It separates the roles played by the two conflicting personnel in international trade. It tries to introduce the problem of transfer pricing plus the viable methods of measuring and evaluating the real performance in an organization. The paper tries to find the avenue, through which these subsidiaries can adjust the foreign accounts in relation to the prevailing inflation rates (Barth et al. 45).

1.4 Research Questions

After a careful look at the statement of the problem of the paper, it is very clear that these questions were at the forefront of the research study. This, therefore, implies the research paper tries to answer and explain the following research questions pertaining to the firms engaging in business in the Egyptian trade area bloc. The research questions are as illustrated below:

i. The research tries to explain as to whether the multinational companies can accurately measure the environmental effects in Egypt on the foreign subsidiaries performance and their ultimate managers’ performance. These environmental factors include issues like legal, economic, cultural, technological, political and social factors.

ii. What is the real and viable transfer price for the evaluation of the actual performance of foreign subsidiaries plus their respective managers?

iii. What is the viable translation method for the financial statements of foreign subsidiaries from the Egyptian currency to that of the parent country?

iv. What action should multinationals take in order to adjust and fit the financial statements of the Egyptian subsidiaries with the effects created by the inflation rates put into consideration? Will these remedies avoid the rampant affection by the same inflations to the real performance of the subsidiaries and their respective managers?

1.5 Research Assumptions

This section discusses the objectives and assumptions of the study. Practically speaking, the paper is based on this assumption. There exist very significant relationships between the environmental variables of the host country (where in this case Egypt is) and the performance of the subsidiary firm (represented by ROI). This relationship can be measured. Briefly, this performance of the subsidiary is affected by these environmental factors and the variables in Egypt.

1.6 Research Objectives

The objectives of the study are subdivided into the main or broad objective and the minor or specific objectives. The main objective of this study is to develop the performance measurement and evaluation tool to the multinational firms in Egypt. This is done considering the effect of the environmental factors and variables in Egypt as compared to the performance of the subsidiaries and their respective managers.

The main objective is subdivided into specific objectives as follows:

i. To study and investigate the environmental factors that affect the multinationals’ performance and their managers in Egypt.

ii. To measure the effectiveness of the environmental factors and the variables on the performance of multinationals’ operating in Egypt.

iii. To determine the viable transfer price, which the multinationals will use for the evaluation and measurement of the actual performance of these foreign subsidiaries in Egypt.

iv. To determine the viable transfer price, which the multinationals use for measurement and evaluation of the real performance of foreign managers on their respective subsidiaries.

v. To determine the viable translation method for the financial statements of the foreign subsidiaries for the measurement and evaluation of the real and actual performance of the foreign subsidiaries and their managers.

vi. To determine the viable method used to adjust the financial statements of foreign subsidiaries due to inflation in Egypt. This will be used in the evaluation and measurement of the real and actual performance by the foreign managers plus their subsidiaries.

1.7 Organization of the Paper

This paper has the title “Types of Internal Control of Weaknesses Egyptian Firms suffer from.” This, therefore, calls for the organization of the paper in some very meaningful chapters. It is organized into a total number of four chapters. These chapters are then followed by the reference section at the ultimate end of the paper. It begins with an introduction that deals with the introductory paragraphs to the paper. The introduction runs from the statement of the problem, background history, assumptions and objectives of the study. It also contains the limitations of this study as well as shows the importance of it. It proceeds further to the review of literature alongside the methodology used in the data analysis. Finally, the paper discusses the issues considered very important before making some conclusions and recommendations in the later parts (Barth et al. 78).

The introduction deals with a more theoretical approach to the paper and thus, will only cover the basics of the theoretical circumstances underlying the paper. The introduction basically prepares the reader to the issues laid down in the paper in the subsequent chapters. Chapter two will cover both the review of the literature therein and the methods employed in the study. The literature review will dwell on the issues related to the multinationals, their definition, and the performance measurement criteria. The methods would lead to the adventure of the major factors affecting the multinationals in Egypt.

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Chapter Two: Literature Review and Methodology

2.1 Multinational Companies (MNCs)

The definition of the term multinational is very varied and depends on the environment and the setting, to which the term is to be used. The definition of the term is, therefore, very univocal, but very ubiquitous in its use. This variation in the definition is due to the existence of a number of scientific programs and methods used for the same definition. Several trends exist in the literature for the definition of this term. First, it can be defined depending on the host countries’ members. In its simplest definition, it is a business organization that operates in more than one single country.

2.2 Performance Measurement

Another multinational corporation is an enterprise that owns and controls other factories, miners, offices, outlets, and distribution centers in more than one country. Some definition puts it as an undertaking, where one owns and controls service or the production of some facilities in more than one country. This definition, therefore, excludes the export cases in a country, even if they established the distribution outlets in the host country. The best-fitting description of this term as put down by the Organization for Economic Cooperation and Development (OECD) is that this corporation comprises entities or companies, whose ownership is either private, static or mixed and then established in different countries (Beck 67). These companies are much more linked that one could easily influence the activities of the other in a specific country. This could in the sharing of resources and knowledge available in a particular country. In simpler, this is a business enterprise that controls and owns the income-generating assets in more than a single country.

Chapter Three: Discussions and Developments

3.1 Inflation rate in Egypt

The miscalculations by the government have greatly factored inflation in the country. The government merely concentrates on the creation of workaholics at the expense of increasing productivity. This menace greatly affects the country’s economy in a negative way. It also undermines the value of the currency in the same country. In the long run, the inflation rates harm the confidence of the citizens alongside their leaders (Bencivenga and Smith 100). Land reforms have also devastated the agricultural sector, which is considered the backbone to the economy of several African countries. The manufacturing sector declined due to the inclusion of inexperienced persons in the management of several mining fields in the country. This move undermined the security of the property in question.

3.2 Increased Use of Foreign Currencies

This hyperinflation forced the government to declare inflation illegal. This was in the year 2007. Any person, who raised the prices of goods, was subject to imprisonment. Several executives in corporate bodies were arrested and detained for escalating the prices to the goods they offered. It amounted to freezing of prices, which indeed never bore any fruit in the long run. The freezing of prices played very little role in stopping the inflation rates in the country.

A number of shops were licensed by the government’s central bank to deal with foreign currencies exchange. This led to the increased use of foreign currencies by the citizens in most of their daily dealings. The local shops declined the use of their currency claiming that they were in need of the foreign currencies to take care of their imports. Many businesses and the vendors in the streets attained this without a proper license from the Central Bank of Egypt.

In 2009, Finance Minister removed the restriction of using only the Egyptian currency. It only aggravated the practice that many citizens had been engaging in. They were allowed to use the euro, US dollar among others, especially in international trade in the area. Amazingly, the civil servants and teachers still received their salaries in the local currency (Caprio 12).

Inflation in Egypt became a great challenge for the citizens of the country. This is because the prices in various shops were still in the local currency unit. These prices got adjusted severally within a specific day. It called for the exchange of any acquired Egyptian shilling with a foreign currency immediately as most people did not want to possess the Egyptian shilling that had lost its value in the market due to excessive inflation. For instance, a bus operator in the streets of Cairo would charge the commuters in the local currency, but this charge was very different depending on the time of the day. It could reach its highest peak in the evenings. The bus operator would then exchange it with other foreign currencies severally in the day but at very different rates.

The exchange transactions took place just within the streets or at some makeshift offices within the suburbs of the city. This is what constituted the black market. It is an arena in the market, which is totally against the law. They could easily flout any other law of the land. It served as a market channel for fast consumer moving goods like soaps, bread, and other grocery goods. The groceries no longer operated on items that were strictly controlled. They then charged customers more in case they were paying using the local currency.

Chapter Four: Summary and Conclusions

4.1 Conclusions

Multinationals are considered a very important aspect of business developments in the current world. The little venture has been done into the sector of international business not until very late in the twentieth century. For quite a remarkable period of time, IBM and Coca-cola have been dominating the sector of the multinationals. These indeed have been the few existing brands in the global market. This market has been in the hands of very large corporations like PepsiCo, Colgate-Palmolive, Shell, and Coca-cola. Recently, other companies like Nike, Apple, Honda, and Microsoft also became interested in the same field (Claessens 121). Due to the laxity in the barriers to international trade, small and medium-sized companies have ventured into this field. More businesses are thus engaging in the building of an international brand forefront. All in all, with these developments in the international arena, Egypt still languishes behind in the same field as the political, legal, and economic situations in the country do not favor the multinationals to expand their territories in the same field.

Several factors termed the variables also affect the performance of these subsidiary firms during the measurement and the evaluation of the performance of the same subsidiary. These include features like the transfer price between the subsidiaries themselves, the change in the foreign currency and the inflation problem (Boyd and Smith 54). Therefore, this calls for the separation of the management role from that of the subsidiary in order to attain some standard evaluation tools in the performance approval. An approach that is closer to this would help the subsidiary to efficiently underscore its mandate in controlling the trade mishaps in the country, wherein this case Egypt is.

The multinationals must incorporate the environmental factors in the establishment of the performance by the managers and the subsidiaries therein. The problem connected to the transfer of prices becomes even more complicated with the way Egypt handles such policies. The government is actively involved in the interest earned from such prices and thus, it will automatically be very different from the country of origin of the multinational. The other factors of foreign currency and the ever-changing inflation rate in Egypt greatly affect the multinationals in this area of operation.

4.2 Recommendations to Multinational Business in Egypt

The best way to expand much more in the market is for a company to diversify its market to other countries and let not the idea of depending on one country alone. There exist a number of growth stages for the development of multinationals (Cull et al. 56). This is a very important tool for diagnosis in the field of international markets. It transforms metrics into a strategic framework for the improvement of the market base of the company in question. The stages are as described in the following passage:

4.2.1 Making the Product Recognizable in the Market

It is important to make the consumers aware of the product so that they can easily agree to have seen the same brand. This can be achieved through the availing of the name of the brand to the public through the simple of advertising. Most companies do this through the various advertisements across the world basically through events relating to the activities of the company like some sporting activities. It is amazing to understand that a child deep down in the rural setting of Egypt really understands the product of a multinational. To add more, some regions even believe that the actual name of a product is actually the name of the company. This would greatly increase the sales volume of the company in question. They do not understand that this could just be merely a name. This indeed increases the sales volume of a brand, since most people would simply go for it by that same brand name as the general name to the product.

4.2.2 Memorable Title and Products

After recognition then the brand name should be very easy to memorize by the customer. This involves the use of names that reflect some quality in the same product. It should then be mentioned first in any setting in society. This is in accordance with the service package that is perceived with lots of familiarities. The brand should then be viewed with a lot of favor from the customers therein. It should meet the potential capability of the buyers. The company should use a scale ranging from poor to outstanding in order to gauge its market share capability. Therefore, the customers’ trust must be built on the same foundations (Cull 345).

4.2.3 Separate and Distinctive Position in Egypt

The brand of the multinational should be very different from the other products in the market. This will help in meeting the standards set by the immediate competitors in the same market. In order for the product to be in preference to the others in the market, a clear distinction in the model must be visible from the outside, even if it means to be within the package of the same product. Constant communication will be necessary for acceptance and other important information about the brand. This will generally boost brand equity under the question.